Treasuries Fluctuate as Traders Await Guidance From Fed Minutes

  • Yield curve flattens as 2-year yields near highest since June
  • Futures show 50% probability of interest-rate increase in 2016

Treasuries fluctuated, with two-year note yields holding near the highest since June, as traders await the release of minutes from the Federal Reserve’s July policy meeting that may shed light on the path of interest rates.

Measures of the yield curve flattened as short-dated notes, which are more sensitive to Fed policy expectations, underperformed longer-dated securities. New York Fed President William Dudley on Tuesday said that an interest-rate increase in September was possible. 

Traders have added to wagers on a 2016 rate increase, assigning a 26 percent chance to a hike in September and coin-flip odds to a move by year-end, according to futures prices compiled by Bloomberg. Still, the relatively subdued reaction to Dudley, who serves as vice chairman of the rate-setting Federal Open Market Committee, reflects investors’ skepticism of Fed guidance, according to Kevin Giddis, head of fixed income at Raymond James & Associates.

“You have to pay some heed to what the Fed members say, but you don’t really believe them,” Giddis said. “The smart money continues to buy into the weakness, and I’m expecting a more dovish tone from the minutes.”

Fed Minutes

The yield on two-year notes was little changed at 0.75 percent as of 11:00 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.75 percent security due July 2018 was 100.

Benchmark 10-year note yields were little changed at 1.57 percent.

After liftoff from near zero in December, officials have twice cut their projections for the path of rates this year, as improving U.S. economic data contrast with signs of slowing growth abroad. 

St. Louis Fed President James Bullard is due to speak on the U.S. economy and monetary policy just before the scheduled release of the meeting minutes at 2 p.m. Wednesday in Washington. In an interview last week, Bullard called for one rate hike this year.

“The regime will persist so the policy rate can stay about flat over the policy horizon with just one rate increase,” Bullard said in an interview on Wharton Business Radio on Aug. 12.

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